Global economy

The international co-movements of business cycles is a key determinant of trade and monetary policy, but the ways in which it is affected by technology, TFP, and trade openness are not fully understood. This column shows how such co-movements are affected by trade linkages and technology. It finds that non-technology shocks contribute more to international co-movement than TFP shocks, and that transmission plays a notable but small part in co-movements.

Externalities can have a powerful effect on financial stability. This column studies the amplification effect that can operate despite value at risk regulation, which suffers from the ‘fallacy of composition’. It shows that the magnitudes of booms and busts are amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. In addition to economic models, legal and political factors should also be considered.

Foreign direct investment has traditionally been viewed as a key driver of prosperity, and modern FDI has also become a vehicle for transferring intangible assets. This column uses a counterfactual experiment based on a hypothetical world with no outward or inward FDI to and from low-income and lower-middle-income countries to examine the effects of FDI on trade, domestic investment, and welfare. World welfare falls by about 6% and all countries lose out, with some poorer countries losing over 50%. World trade falls by 7%, with the losses again unevenly distributed.

Since the 1980s, labour compensation relative to aggregate output has been on an inexorable downward trend across major developed economies. This column deploys a simple accounting technology to tease out the driving factors behind this, focusing on the US. The findings highlight the key role of under-appreciated factors, including supercycles and boom-bust effects and rising depreciation. The analysis suggests that while the effect of some factors may dampen or reverse, others will likely continue at an uncertain pace.

GDP counts investment twice – when it occurs and when rental income results. This column proposes an amendment to the national accounting system that only includes investment once. This would ensure that national income accounts do not overstate the resources available for consumption. It also has major implications for the estimation of the capital share in income.